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Investors in credit derivatives expect spreads or risk premiums to widen further over the next couple of months as fears escalate over the impact the ravaged housing and structured finance markets will have on the banking sector and broader global economy, according to new research.

Buyers are concerned about the expectation of greater spread volatility over the next few months due to the threat of economic slowdown and further fallout in the bank and bond insurance sector, said a survey of credit derivative investors from Bear Stearns.

Bear said a sharp rise in corporate default rates, the price volatility of individual securities, global liquidity and the continued deterioration in the US housing and structured finance markets will also drive spread volatility.

Alberto Gallo, fixed-income analyst at Bear Stearns in London said: “Risk fears are spreading among investors, as half of respondents expect an increase in spreads and volatility going into the new year. Our view is consistent: we believe that the current phase of high volatility and wider spreads will continue.”

As a result Bear Stearns said investors in the trillion dollar credit derivatives market are expected to turn to products such as long/short tranches, so-called fixed recovery trades and constant maturity structures, although they will continue to shun leveraged index products.

Gallo said: “The credit squeeze is still on and is likely to stay for a while before central bank liquidity does anything to medium and long term corporate financing rates.” He added Bear is unimpressed by the rate cuts by the US Federal Reserve, and that further cuts would only have a small immediate effect on borrowing costs and liquidity.

Gallo said: “It is important to remember that the securitisation boom has been a huge source of liquidity: cash collateralised debt obligation allowed banks to outsource their risk and lend freely, while synthetics lowered corporate financing costs.”

However, the turmoil in the credit markets has sliced through issuance of structured credit instruments like collateralised debt obligations, which in turn has reduced the availability of liquidity and forced banks to rein in lending over the past five months, according to Bear analysts.

Gallo said: “In our opinion, a rebound in issuance activity could have the much needed calming effect on credit markets. Our survey shows that this is possible, as 38% of investors say they would be more interested in buying at wider spreads.”